Description

Opportunity Overview

Merry X-mas / Happy Holidays folks...

TLDR: Recent IPO InPost is a massive COVID beneficiary with questionable management history, significant customer concentration and nascent but accelerating competition in crown jewel domestic market trading at rich valuation of 20x next year’s cons. EBIT.

There should be a lot of ways to win with this short, but the thesis has two overarching points:

1.       Polish / domestic growth targets cannot be taken for granted due to increasing competition

2.       International expansion not a home run – has been tried before and was a failure; investors should not assign much value to this business

On a technical note, the short setup seems favorable.  Despite a 38% decline in share price since the IPO, sell-side and investor sentiment remains positive.  Every analyst has either a buy or neutral (no sell ratings).  Average analyst PT is 16.63 EUR or 60% upside from today’s price.  There will also continue to be selling pressure from PE seller Advent who own ~46% of shares outstanding.  Float represents ~40% of shares.  Lots of available borrow at top rate. 

Background

History of InPost:

 Integer Group (now InPost) was founded more than 20 years ago by Rafal Brzoska, originally offering leaflet distribution services. By 2004, the company had become a leader in the distribution of non-addressed leaflets in Poland. By 2010, it had transformed its business and introduced parcel lockers into the market, which was when InPost was established. Parcel lockers quickly gained widespread use in Poland as the preferred mode of delivery. In 2015, InPost also started courier / logistics services to complement the locker business. Around this time, it attempted a number of expansions into international markets (including Germany, Austria, Switzerland, Russia and Hungary), but these were unsuccessful.  The Company delisted in 2017 and was scooped up by Advent International on the cheap (€102m PF equity value) because of high debt levels incurred in rapid international expansion strategy and lack of scale in Poland. InPost subsequently exited most of these international markets.  Post the acquisition by Advent, InPost redeployed its lockers to other locations in Poland and focused entirely on gaining momentum in its domestic market. 

 Fast forward a few years and the pandemic catapulted InPost’s private market valuation and Advent began considering a re-listing.  Not only did COVID accelerate e-commerce in Poland but self-serve lockers also make for a perfect alternative to in-person delivery during a pandemic.  In January 2021, InPost came out of the IPO gate with an €8bn market cap.  Quite the win for Advent for a slightly less than 4-year investment hold.  One Polish research analyst summed up the situation at the time of IPO as follows: “probably nobody in Poland expected that Brzoska’s business would get a second life so fast … InPost’s debut in Amsterdam looks now as a sort of resurrection at totally unimaginable valuations, showing how the pandemic is a strong catalyst for e-commerce growth.”

Advent and co-investors sold 35% of their stake in an all-secondary offering, which is larger than normal for an IPO.  Advent owns a little less than 50% of the remaining equity with Rafal owning 12%.  Public float represents about 40% of shares.                    

Quick Primer on Delivery Lockers / Automated Parcel Machines (“APMs”):

 If you’ve ever opted for “locker” pickup option on an Amazon order, you’ve used an APM. 

The locker value proposition is twofold: (1) for merchants, it’s 25% - 30% cheaper than to-door delivery once a locker network is built-out (b/c final mile typically represents ~50%-55% of the total cost of to-door parcel delivery); (2) ESG angle – locker delivery entails much lower Co2 emissions than do-door delivery (fewer drivers and fewer stops).  In the UK for example, the ESG angle plays into efforts by Sadiq Khan to reduce traffic congestion and Co2 emissions in London.  A third but more debatable part of the value prop is convenience – for certain consumers who may work non-traditional hours, parcel locker pickup is more convenient / secure than to-door delivery. 

In Poland to-door has 60% share vs. 40% share for out-of-home / lockers.  In the UK, to-door has 80% of deliveries vs. 20% share for out-of-home / lockers.  Increasing APM adoption both in Poland and throughout Europe is among InPost’s top priorities.  When really pressed, IR has conceded that the way InPost plans to really catalyze APM adoption, especially outside of Poland is to “shame consumers into not ordering things to-door.”  It does raise questions about the value proposition of a product when a customer has to be “shamed” into using it. 

Short Thesis

1.       Achievement of Polish growth cannot be taken for granted due to increasing competition.  Polish e-commerce market is growing very fast and APM is taking share from to-door.  When you have an APM market that is growing at 25% PA, it’s going to invite significant competition, which is exactly what’s happening.  Today, InPost has 95% market share in the Polish APM market, and consensus assumes this will come down gradually over time.  However, I believe consensus and mgmt. forecasts underestimates / downplays the impact of nascent competition on InPost’s crown-jewel home market, where it has enjoyed virtually no competition for several years.  Relatively minor changes to InPost’s APM utilization and pricing assumptions result in significant deterioration to InPost’s earnings power in Poland.              

a.       Customer concentration: huge customer concentration with Allegro.  Allegro is InPost’s largest customer and is attempting to compete with InPost by standing up its own APM network

                                                   i.      Allegro has leading market share in Poland e-commerce market with ~40% of volume.  InPost now delivers close to 70% of Allegro’s parcels, up from mid-teens just a few years ago.  This translates into Allegro being ~55% of InPost’s volumes and 47% of its revenue.  InPost recently inked a 7-year contract with Allegro with minimum volume commitments thru 2026.  However, these minimum volume commitments do not preclude Allegro from standing up its own APM network – it has announced an intention to install ~3000 APM’s by YE 2022. 

                                                 ii.      BABA-owned AliExpress announced in May 2021 an intention to roll out 8000 APMs in Poland in 2022.  INPST does not have much exposure to AliExpress volumes, but nonetheless it’s another indication that competition is really heating up in the Polish APM market.  In terms of benchmarking, Allegro is 12x the size of AliExpress in Polish e-commerce, which seems to imply that Allegro’s initial target for 3,000 APM’s is very small relative to its potential.

                                               iii.      Other players such as Swipbox has announced an intention expand APM capacity in Poland, and Amazon is rumored to be considering entering this market in earnest. 

b.       Issues with consensus / mgmt. forecast and valuation implications:

                                                   i.      We know from experience that heightened competition in a particular market can undermine both volume and price of an incumbent, yet consensus forecasts seem to reflect (1) flat / increasing utilization rates and (2) flat / slightly increasing revenue per parcel for InPost.       

                                                 ii.      Consensus is simply rolling forward InPost’s all-time-high utilization numbers without assuming any sort of reversion to pre-COVID levels or building in any degradation to account for competition.  One early indication of a problem here is that InPost’s Q3 utilization rate in Poland appears to have already reverted to a pre-COVID level (see chart below).

                                               iii.      InPost’s revenue per parcel has been stable over the past several years, but only because there has been virtually no competition in the Polish market!  I believe increased competition will put pressure on InPost’s revenue per parcel in the next several years.  

                                               iv.      Putting it all together, below I’ve laid out my Poland “Increased Competition” case vs. what consensus appears to be modeling for the segment.  As mentioned, relatively minor tweaks to the utilization rate along with LSD pressure on revenue per parcel results in a significant miss vs. consensus gross profit.  Likewise, the impact to EBIT is even more significant given the high fixed-cost nature of the APM business.  I’ve assumed no changes to InPost’s cost structure as a result of increased competition. 

                                                 v.      Based on a 15-month price-target (March 2023), when InPost will be providing guidance for FY 2024, I conclude there is ~30% downside for the shares in this Poland increased competition case.  This is based on a 13x forward EBIT multiple, well above 10x EBIT where best-in-class transportation peer Deutsche Post trades.  I’ve chosen 13x based on the 12x 2024 multiple at which InPost is trading today (assuming the market is pricing in an 8% annual return for the shares). 

2.       History of failed international expansion – why is this time different?  Despite not breaking even on an EBITDA basis today, consensus assumes that the international segment (UK, Italy and now France with the Mondial Relay acquisition) will account for 15%+ of the Company’s EBIT by 2024.  There is also a history of failure when it comes to international expansion.  The Company nearly went bankrupt the last time it tried to expand aggressively internationally.  InPost has written off expansion into Germany, Austria, Russia, Switzerland due to failure last time around, so it’s limited in the geographies it can target outside of Poland.  Today, InPost is expanding aggressively in the UK, Italy and recently entered France via the €565m acquisition of Mondial Relay.

a.       This is basically the bear case for InPost’s efforts to increase locker adoption outside of Poland, as expressed by a fmr Amazon senior exec in Europe: “lockers are a good solution for consumers who live close and have delivery issues but will never emerge as a core of the last mile delivery market. Amazon and other incumbent parcel players have tried to encourage locker usage for years, but consumers have been slow to adopt. Some counties have a cultural difference in accepting lockers, which remove the convenience benefits of to-door delivery.”

b.       Why has InPost been successful in Poland?  Short answer: in Poland, InPost has unique advantages that do not exist in other geos 

                                                               i.      Polish consumers are much more price-conscious than customers in the UK, Italy and France

                                                             ii.      In Poland, InPost has locker network density and half of the population is within 7 minutes of a locker (1 locker per 2.8k people); in the UK, their network is subscale (1 locker per 56k people) so would take a long time to build up scale to truly compete with to-door

                                                           iii.      In Poland, InPost is vertically integrated (control delivery from merchants to lockers) whereas in the UK they rely on 3Ps – their largest delivery provider CitySprint was recently acquired by DPD (a competitor to InPost), which could prove problematic; the Company did not have good answer to why this will not become an issue

c.       UK expansion in particular is risky.  UK is very competitive market with Amazon, DPD, others all with significantly more scale than InPost (see chart below).  It is also unclear that UK consumer wants to use lockers.  Surveys indicate that 90% of UK consumers prefer at-home delivery to lockers / out-of-home.  To-door still represents 80% of the market in the UK and this share has been relatively sticky.  Moreover, InPost’s subscale position in the UK creates a chicken / egg problem.  This problem manifests when InPost is trying to acquire merchants: feedback from merchants is often “I’m interested in lockers but there aren’t enough of them so I won’t promote it as a delivery option to customers.”

d.       Channel checks indicate Chairman and CEO Rafal Brzoska is an “empire builder.”  He was responsible for the Company’s disastrous international expansion in v1 of InPost.  Advent has one foot out the door and is not interested in babysitting Rafal’s capital allocation decisions.  As Chairman / CEO, Rafal controls the Board.  I believe it’s constructive to the short that Rafal continues to lead the company despite a poor track record.          

e.       Issues with consensus / mgmt. forecast and valuation implications:

                                                   i.      In addition to the challenges described above, there are two other reasons why the international business may be less profitable than consensus is forecasting: (1) Revenue per parcel almost 2x in the international segment what it is in the Poland segment – this is likely to come down. (2) Consensus is assuming significant gross margin improvement, despite no evidence of ability to achieve this

                                                 ii.      In an illustrative scenario in which the international segment fails to breakeven by 2024 but InPost’s Polish business performs in line with consensus expectations, there is ~12% downside for the shares, assuming the same 13x EBIT multiple.  However, if both the international business fails to breakeven and the Polish business performs in line with my increased competition case, I believe there is ~50% downside to the shares.       

Catalyst

- Further delays to ahieve breakeven international EBITDA profitability 

- Amazon / Allegro / AliExpress increasing pace of APM roll-out in Poland

- Continued deterioration of utilization in Poland